Transfer Pricing

Transfer pricing is generally referring to intercompany pricing arrangements for the transfer of goods, services and intangibles asset between associated persons.

Main Goal of Transfer Pricing Rules

The main goal of these legislation and rules is to prevent profit shifting from high-tax countries to low-tax countries and to ensure that profits are taxed at the place where value is actually created.

Meaning of Control and Associated Person

Definition of control in Section 139, which defines control as both direct and indirect control. Two companies are associated companies with respect to each other if one of the companies participates directly and indirectly in the management, control or capital of the other company; or the same persons participate directly or indirectly in the management, control or capital of both companies. a) Between companies one of whom has control (>50%) over the other
b) Between individuals who are relatives of each other; or
  i. Parent
  ii. Child (including stepchild/ adopted child)
  iii. Sibling
  iv. Extended family
c) Between companies both which are controlled by some other company (common control)

Type of Controlled Transaction

(a) Sales or purchases of raw materials, stock in trade or other tangible assets
(b) Royalties/ license fees/ other types of considerations in connection with use of intangible assets
(c) Management fees including charges for financial, administrative, marketing and training services
(d) Research and development
(e) Any other services not previously mentioned
(f) Rents/ lease of assets
(g) Interests
(h) Guarantee fees

Contemporaneous Transfer Pricing Documentation

Full Transfer Pricing Documentation

1.0 Organisational structure
2.0 Financial information and analysis
3.0 Business nature and it’s environment
4.0 Controlled transactions
5.0 Pricing policies
5.1 Strategies, assumptions and factors
6.0 Comparability, functional and risk analysis
7.0 Selection of Transfer Pricing methodology
7.1 Application of Transfer Pricing methodology
8.0 Supporting documents for developing Transfer Pricing analysis
9.0 Index

Limited Transfer Pricing Documentation

The de minimis rules has introduced in Malaysia’s Transfer Pricing guidelines and exceptions whereby taxpayers with the following threshold may opt for limited Transfer Pricing documentation if:
• Gross income equal or not exceeding RM 25 million
• Total amount of related party transactions equal or not exceeding RM 15 million

1.0 Organisational structure
4.0 Controlled transactions
5.0 Pricing policies

It is important that intra-company services are well documented and characterised to ensure that the parties are able to demonstrate the nature of services and benefits received. The basis of the cost allocation must be appropriate rate, whereby whether the mark-up should be imposed on a pass-through or third-party cost basis must be examined.

The documentation must contain the followings:

i. Description of the intra-company services provided and received
ii. Identity of the service recipient and provider
iii. Business rationale for the provision and receipt of such services
iv. Description of the benefits of each category of services
v. Calculation of the management fee